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The Difference Between Employer - Only and Employee - Only Plan Contributions

Submitted by pselleh on Mon, 07/23/2018 - 13:00

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The Difference Between Employer - Only and Employee - Only Plan Contributions

Mon, 07/23/2018 - 09:00

Undoubtedly, the world of employee benefits is ridden with jargon. One of the biggest obstacles when choosing an employee benefits package is having to understand the differences between employer-only and employee-only plan contributions. To help you make your decision, this post will expose the differences between employer-only and employee-only plan contributions.

Employer-Only Plan Contributions

Some retirement plans are funded only by employers. These employers automatically deduct a portion of their employees' paychecks and deposit the funds into a retirement account. Since employees cannot opt out of these deductions, this system raises questions about whether the money should be considered a "contribution."

The IRS advises: "Contributions made by the employer to an employee retirement plan (whether the plan provides for elective deferrals or not) are not included in employee income. However, any additional contributions made by the employees are included in income, unless they are made under elective deferral provisions.

Where no deferral election is possible (such as in a defined benefit plan), employee contributions are included in income." (IRS.gov) Put simply, this means an employer can theoretically offer a potential employee a salary and section off part of that salary for a retirement fund. To highlight this point using an example, let's say a new hire named Victor is offered a salary of $60,000 per year.

An employer could consider 10 percent of that salary as a (non-elective) contribution to a retirement fund. Victor will only really see $54,000 per year (before taxes). His "contribution" is considered part of his salary, even though he won't have this additional money until retirement.

Employee-Only Plan Contributions

Employee-only plan contributions most often take the form of healthcare. When an employee finds that a health care plan provided by his employer is insufficient, he or she can seek additional coverage. An employee might contact an insurance company and buy supplemental insurance benefits.

These benefits paid only by the employee, might take the form of a prescription or orthodontics plan. Likewise, an employee might choose to ignore the life insurance options offered by his or her employer and seek an individual plan. Though an individual plan will almost certainly be more expensive than a group plan offered by an employer, many still choose to pursue this option so that they can choose their own coverage.

A growing trend is employee-only retirement contributions. Some employees chose an outside company to administer their plan and choose where to invest their funds. This reduces costs for employers. There is no formula to give you a "universal figure" that applies in every situation, for every insurance plan. Benefits plans will come at additional costs to you. It's your responsibility to crunch some numbers and find out if the costs are feasible for your business.